When diversifying your portfolio, pick different investments because each asset class (such as stock, commodities, indices, etc.) is expected to reflect different risk and return investment rates and perform differently in any given market environment. By doing so, you make sure that gains for certain investment offset losses in other investments. Remember, even if your intention is to lower risk, don’t restrict your investment to blue-chip stocks only.
Contrary to popular belief, diversification isn’t a one-time task. Once you have a target asset allocation you need to keep it on track with periodic rebalancing. There’s no “set it and forget it” approach when it comes to trading. Rebalancing is the process of buying and selling assets over time to maintain a desired asset allocation, and here’s why it’s important. Portfolio drift often causes your asset allocation to shift away from your target, however, regular rebalancing not only helps keep your portfolio aligned with your target allocation, but it also adds to your long-term returns.
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